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Title: Capital-Skill Complementarity and Inequality: Twenty Years After

Author(s): Lilia Maliar, Serguei Maliar and Inna Tsener

Publication Date: August 2020

Keyword(s): capital-skill complementarity, CES production function, skill premium and skilled and unskilled labor

Programme Area(s): Monetary Economics and Fluctuations

Abstract: A seminal work of Krusell, Ohanian, Ríos-Rull and Violante (2000) demonstrated that the capital-skill-complementarity mechanism is capable of explaining a U-shaped skill premium pattern over the 1963-1992 period in the US economy. However, the world experienced an unprecedented technological change since then. In this paper, we ask how the finding of their article change if we consider more recent data. First, we find that over the 1992-2017 period, the skill premium pattern changed dramatically, from a U-shaped to monotonically increasing, however, the capital-skill complementarity framework remains remarkably successful in explaining the data. Second, we use this framework to construct a projection, and we conclude that the skill premium will continue to grow in the US economy.

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Bibliographic Reference

Maliar, L, Maliar, S and Tsener, I. 2020. 'Capital-Skill Complementarity and Inequality: Twenty Years After'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15228